This is one of the most difficult questions to answer. Save too little and you may have trouble paying your bills at the end of your life; save too much and you risk sacrificing the quality of your present life for an uncertain future.
For many people, the retirement benefit received from the Social Security when they stop working will be insufficient to maintain their current lifestyle. This means that you will need to save additional money to supplement the official benefit for the duration of your retirement.
The question is how much money to save. There is no guaranteed formula to arrive at this number, as retirement can last a few decades and many variables can affect the outcome of your investments over that time. There are, however, some pocket rules that can guide your planning. There are two most commonly used methods to calculate how much you should have saved.
1, 3, 6, 9
The first rule of thumb used is the so-called 1, 3, 6, 9, which indicates how many annual salaries a person should have saved, according to their age, exclusively for retirement:
35 years = 1 annual salary
45 years = 3 annual salaries
55 years old = 6 annual salaries
65 years old = 9 annual salaries
So, for example, a person earning R$5,000 a month should have saved R$60,000 at age 35 (12 x 5,000), and so on.
This means that the total accumulated at age 65, added to the Social Security benefit, would be enough to mantain the same standard of living held during the active years until the age of 85.
The 4% Rule
Another well-known method is the 4% rule. It is based on the premise that if your annual withdrawal is limited to 4% of your total savings, adjusted annually for inflation, your money will last for about 30 years.
Using this rule as a starting point, upon retiring you should have saved the equivalent of 25 times your desired annual withdrawal total. For example, if you want to withdraw R$65,000 each year, you will need to have a total of R$1,625,000 invested when you retire.
Before you panic, remember that this figure doesn't take into account other sources of retirement income. If you know that you will be able to count on BRL 15,000 per year of additional income (Social Security, rents, etc.), then instead of BRL 65,000 you will only need to withdraw BRL 50,000 each year. This means that the total to be saved will be BRL 1,250,000 instead of BRL 1,625,000, a difference of BRL 425,000.
Some important points to keep in mind:
These are just rules of thumb, estimates that you can use to guide your planning, as there are so many variables that can affect your savings over two or three decades.
These estimates consider that in order to maintain the same standard of living as when you worked, the monthly withdrawals will complement the Social Security benefit and the savings will be exhausted at the end of the projected period.
A critical factor to consider in achieving the projected level of savings is how that money will be invested over the course of that time. It is necessary to ensure the restoration of inflation and, as far as possible, to obtain real growth.
Finally, care must be taken with the level of monthly withdrawals. Remember that compound interest makes all the difference in terms of profitability. If your withdrawals significantly reduce your capital early on in retirement, you will have less money to grow over time.
